When a consumer in Fort Lauderdale, Florida, sees no way out of debt, bankruptcy gives them a legal option. However, they may hesitate to file from fear of losing their home. While it is possible to keep a home in bankruptcy, it depends on various factors.
Mortgage debt in Chapter 7 bankruptcy
Many debtors commonly file Chapter 7 bankruptcy, a liquidation process that requires selling nonexempt assets. The court assigns a trustee, who values the assets and divides proceeds among creditors according to priority. Mortgages are secured debts, or debts with collateral, meaning debtors in most states could lose the home in Chapter 7.
A debtor may surrender their home to the lender to absolve personal responsibility for the debt if they choose not to keep the home. Some lenders may be willing to work with a consumer to reaffirm the debt, which creates a new agreement.
Ways to save a home
Chapter 7 requires the debtor to pass a means test of disposable income, so if they fail, they must file Chapter 13. However, Chapter 13 is often more beneficial since the debtor doesn’t have to sell assets to pay off debts.
Chapter 13 restructures the debt so that the consumer can include missed mortgage payments in the payment plan. Bankruptcy doesn’t remove liens, which means the debtor needs to maintain payments to avoid losing assets.
If the consumer wants to keep the home in Chapter 7, the equity amount, or home value minus the mortgage, might help them. There are state and federal exemptions that allow a consumer to use equity. Florida allows an unlimited home exemption, so if the consumer is not behind on payments, they can keep the home.
The automatic stay applies in every type of bankruptcy to halt foreclosures. If a consumer is undecided about whether to file, they should speak with a financial advisor to see if the potential benefits, like the automatic stay, are worth it.
